Mortgage lenders make flood insurance mandatory

More jumbo-mortgage borrowers will be required to add flood insurance

By

AnyaMartin

Batteries, flashlights, bottled water. Now more jumbo-mortgage borrowers will be required to add another item to their storm-preparedness checklist: flood insurance.

The Federal Emergency Management Administration is currently re-evaluating flood maps, requiring more jumbo-mortgage holders with homes in high-hazard areas to buy flood insurance. Also, changes to federal law enacted in July are expected to jack up premiums.

Reuters

Storm surf kicked up by the high winds from Hurricane Sandy floods through a home in Southampton, N.Y., Oct. 29, 2012.

Even though flood coverage is only mandated for government-backed mortgages, or conforming loans, lenders generally keep the same requirements for jumbo borrowers who live in high-hazard (Zone A) areas. These are defined by FEMA as having a 26% chance of flooding during the lifespan of a 30-year mortgage.

Both Bank of America
BAC, -1.38%
and Wells Fargo
WFC, -0.48%
require jumbo-mortgage borrowers to obtain the $250,000 maximum coverage available for residential properties under the National Flood Insurance Program (NFIP), which is an arm of FEMA. Homeowners can purchase a second NFIP personal-property policy that covers up to $100,000 to replace a home’s contents.

Homeowners also have the option to buy what is called “excess” flood insurance from private insurers to cover repair or replacement costs above $250,000.

Even if lenders are not insisting on excess coverage, more luxury homeowners in the New York-New Jersey-Connecticut area are asking for estimates and purchasing excess flood insurance this year, said Celia Santana, president and CEO at New York-based insurance broker Personal Risk Management Solutions. “There’s a lot more interest in flood than ever before, and it has not dissipated since the hurricane,” she added. The company, which provides excess flood policies from luxury insurers, including Fireman’s Fund Insurance Co. and the ACE Group, said about 29% of its clients bought flood insurance in early 2013, which is almost double the percentage a year ago. About 1 in 15 PURE customers in coastal areas of the three states bought excess flood coverage, a 28% increase compared with 2013.

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The increased interest in flood insurance is coming at the same time as higher premiums. Annual NFIP premiums currently average $625 but can be as high as $3,000 for maximum coverage in high-risk zones. However, changes enacted under the Flood Insurance Reform Act, signed into law in July 2012, are expected to double NFIP premiums over the next few years. The law ends grandfathered discounts for older properties, especially second homes that are not elevated above the 100-year floodplain. That term refers to the land that has a 1% chance of a flood event occurring in any given year.

Excess flood premiums cost about twice as much as a year ago, Santana said. Homeowners should get estimates of both current rates and the cost of raising a coastal-area home to reduce premiums, Hartley said.

A hypothetical homeowner in a low-hazard New Jersey coastal area with $2 million rebuilding cost and $1 million of contents would pay $400 for maximum NFIP coverage and another $3,812 for excess insurance, according to PURE. That same home in a high-hazard New Jersey location with living spaces above the 100-year flood plain would cost between $1,000 and $3,000 for maximum NFIP and another $4,087 for excess coverage.

More considerations:

Not just single-family homes. High-rise condo-building owners required to buy flood coverage may offset the cost by raising tenants’ maintenance fees, Grabel, of Luxury Mortgage, said. That’s because if the basement is flooded, elevators and other mechanical equipment may fail or mold may build up, causing a health hazard.

Beyond the sea. While Sandy has focused recent attention on hurricane damage, the land around rivers, lakes and creeks also can be deemed high-hazard areas.

You may have no choice. If a borrower in a high-risk zone does not purchase the minimum required flood insurance, the lender will buy it for them and tack on additional fees.

Review reconstruction. Ensure that a home rebuilt after Sandy meets current FEMA standards.

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